The second largest blockchain platform in the world by market capitalization, Ethereum, has been looking to shift to Proof of Stake since 2014. Co-founder Vitalik Buterin sees PoS as key to ethereum reaching maturity. “Ethereum 1.0 is a couple of people’s scrappy attempt to build the world computer; Ethereum 2.0 (with PoS) will actually be the world computer,” he has said. In 2020, the first phase of the Ethereum 2.0 network will go live. Called Phase 0, this initial evolution of the 2.0 network will launch the beacon chain and enable the POS mechanism.
The 12th largest crypto by market capitalization, Cardano, rather than launching a new PoS system, is looking to upgrade its own pre-existing PoS platform as a public network.
Proof of Work was the first blockchain consensus mechanism and is still arguably the most popular choice in achieving distributed consensus. PoW is used by the likes of Bitcoin and Ethereum (for now) and several other cryptocurrencies. Strong as it may be, it comes with disadvantages like high computation requirements, high energy costs and the threat of centralisation by mining pool.
Once you understand PoW and its downfalls, the need for a system like POS becomes clear.
But first... what’s a stake?
In cryptoworld, the stake is the cryptocurrency a user owns and pledges in order to partake in validation.
In Proof of Stake, miners/validators are required to stake their tokens/balance in order to be chosen as the next block creator. Therefore, the miner that stakes the most amount of its currency has the highest chance of being chosen as the leader and creating the next block. Some blockchain solutions don’t follow such principle and instead choose the miner on a random basis.
If a miner is caught cheating or tampers with a block, it loses its entire staked coins. Hence, such a restriction compels the miners to be honest.
Proof of Stake will significantly reduce the consumption of electricity in comparison of PoW and therefore is more environment-friendly. Secondly, the time-consuming mining process will be replaced by a constant amount of computation. This will, consequently, will improve the speed of the entire network.
On the over hand, with the PoS protocol, a miner that holds 51% of the total coins will always be chosen as the leader. As a result, the decentralization of the blockchain becomes futile if a single node always creates the blocks. It is however unlikely that a node would own 51% of the total coins.
Many blockchains, however, have protocols in place to prevent this situation. One such solution is coinage. Where the tendency to be elected as the leader with time reduces or the coin which is the validator which has staked tokens the longest time becomes the leader.
Several other large blockchains are already running a proof-of-stake consensus, including Tezos, Algorand and Qtum.
Tezos runs a staking program under its "Liquid Proof-of-Stake” algorithm, a hybrid between pure PoS and delegated proof-of-stake, or DPoS. Validating blocks in the Tezos network is known as “baking.” Anyone holding the Tezos token can delegate their tokens to a validator to “bake” on their behalf. However, the original owner retains their tokens in their own wallet. Anyone can participate as a baker if they hold 8,000 or more XTZ tokens, called a “roll,” and operate a validator node. The rate of return for staking on Tezos is currently around 7%.
Algorand operates a consensus protocol called “pure proof-of-stake.” It uses a system called “secret self-selection” to choose randomly selected committees of stakeholders that will validate each block. What makes Algorand different is that all Algo token holders are rewarded simply for holding their tokens, regardless of whether or not they choose to participate in the PoS program and validate blocks. Therefore, there’s no minimum stake for earning rewards with Algorand. The current rate of return for holding Algorand tokens is around 5%.
Similarly, Qtum also runs on a pure PoS consensus, where anyone with even a fraction of a Qtum token can become a validator and compete for block rewards. The project has implemented a native application, making it easier for everyday users to participate in its staking program, and there is also a command-line option for more technical users. Staking on Qtum provides a return of around 7% per year. There is no minimum stake, but holding more tokens increases the chances of being selected to validate and process transactions in the network.
Plenty of other blockchains operate staking programs, including EOS, Cosmos and others. Many of these are running variants of the standard PoS consensus, such as DPoS.
However it should be remembered that the pioneer of Proof of Stake is Peercoin, blockchain active since 2012, making it one of the earliest and most pioneering crypto projects, that today passed 500k blocks!
The Peercoin project takes pride in its unique approach because of the added security it provides by requiring that a validator remain invested in the network for upwards of 30 days before they are able to begin block creation. Coinage is a staple of the Peercoin security model, so its economic consequences are something we would like to explore in more depth.
In conclusion, 2020, could be the year of POS. ETH 2.0 could be one of the biggest “Economic Shifts”, a switch to staking and a supply shock increasing demand, can trigger a bull run.